“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


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Tuesday, December 3, 2013

Copper going in one direction; Equities in the other

Most of the readers of this site are market savvy enough to understand the connection between copper prices and the overall global economic picture. It is not called, "Dr. Copper" for nothing. All things considered, one would normally expect to see Copper prices moving in the same direction as equities. In a normal world, this would confirm that stocks are moving higher based on solid, economic performance in general while industrial demand and global growth keep copper prices supported.

That has obviously not been the case for some time now. Part of this is due to the increased supply of copper that came on line as a result of the push into the $3.75 - $4.50 price region. The response from miners was to ramp up production. This new supply has been unable to be absorbed at those formerly rich prices and thus price has been moving lower as copper seeks an equilibrium between supply and demand.



Price is now moving into a zone of strong support which has held the metal for well over a year now. Should this zone give way, and I want to emphasize that I am not saying it will, it would signify that in spite of Central Bank efforts to prop up global economic growth, such efforts are failing. I suspect that even the high-flying equity market would not be able to ignore such a signal for very long.

Take a look at a chart I have created comparing the price of copper against the emini S&P 500. Notice that since 2008, the general price movement of both items has mirrored each other. Copper prices have tended to rise and fall right along with equities. That is "normal". What is not normal is what we have had since February of this year when a huge divergence formed. While copper prices moved generally lower, stocks of course have been heading into the stratosphere.



How long this sort of abnormal disconnect can continue is anyone's guess but in my mind, it merely confirms the view of those of us who believe that the equity markets are nothing but a massive Federal Reserve-fueled bubble being supported only by huge doses of the bond buying programs of these Central Banks. Sooner or later, all markets tend to revert more to the norm. This is the reason why I am closely watching the copper market as it now enters the region of chart support.

Another reason I am noting copper because silver prices have tended to move more in sync with it of late. This goes back to that industrial component of the grey metal. If copper prices are not reflecting solid economic growth (especially in the realm of manufacturing), then silver is going to struggle UNLESS THE FOCUS OF INVESTORS SHIFTS TO ITS PRECIOUS METAL ASPECT. Even at that, it would necessitate a reason to buy the metal and that reason would be a shift in inflation expectations which currently are non-existent in the minds of the majority of market players.

We currently have these two factors therefore working against any sort of sustained rally in silver prices; namely sluggish economic growth worldwide and a lack of inflation expectations. If one or both of these factors shifts, then silver should find buying support. We do want to watch how copper handles itself if it were to drop into this red rectangle. If it can manage to bounce up and away from this region, we should see silver catch some of that as well and perhaps cement a bottom on its chart. Time will tell...


19 comments:

  1. Dan

    I can't tell you how many analysts I have read who are over the top bullish on equities because the economy is steadily improving.
    Sooo…we now have a jobless recovery that requires no base materials.
    They also take great delight in openly mocking the commodity bulls.

    Too much copper? too much oil? too much food? we apparently live in a world of plenty. I hope we appreciate it.



    ReplyDelete
    Replies
    1. Dean;

      Yes, those "analysts" have drank freely of the Kool-Aid.

      All that is necessary to disprove that lunacy is to merely overlay a chart of the S&P 500 with the Balance Sheet of the Fed. Case closed.

      Delete
    2. http://www.investmenttools.com/futures/bdi_baltic_dry_index.htm Dean & Dan, there are also some good charts here that I think more accurately reflect reality. As for Armstrong, the people that go there and ask his advice are for the most part quite amateurish and sophomoric. For the last time, he is a letter writer, nothing more, nothing less; sparks

      Delete
  2. Okay…we have now reached "Peak Armstrong"

    Armstrong just replied to a Q&A email where the poster starts his question like this:
    "Mr. Armstrong; I want to thank you for saving my marriage. You got me out of gold quite some time ago and my wife was always saying that the stories of the gold pushers did not make any sense"

    Yes, Mr. Armstrong…you are an amazing master of cycles and predicting market direction…but really.. now your advice is saving marriages !!!
    C'mon…what's next? Martin, I was a homeless, serial killer, drug addict but now I am happily married with a family and a good job because you told me exactly when to sell my gold !! Investing is now so easy..whee!
    Sheesh….this is getting ridiculous now.

    ReplyDelete
    Replies
    1. Dean,
      Armstrong is a jerk who has been right. He will be wrong in time and then he will be just a jerk that we know he is.

      Delete
  3. Dan, there is another feature of lower copper (and other base metals) prices that is worth mention. An estimated 70% of new silver production is a byproduct of base metals mining. Earlier high prices for base metals like copper translated into higher mining output, including higher levels of silver byproduct supply that was dumped onto the market. Lower base metal mining due to lower prices will reduce the amount of byproduct silver supply, and that should help to firm the price of silver - eventually.

    ReplyDelete
    Replies
    1. Optimist;

      That is an EXCELLENT point! Thanks for sharing that...

      Delete
  4. Hubert -

    I always follow your interesting posts. Which websites do you recommend for learning more about the "inf" Boll and "CDUR" indicators, so that I may understand your TA better? Might also create custom indicators for the MetaTrader 4 trading platform.

    ReplyDelete
  5. Perhaps this has much to do with the copper weakness this year http://www.zerohedge.com/news/2013-05-23/bronze-swan-arrives-end-copper-financing-chinas-lehman-event? The decision did not come until May, but copper players were probably aware of it being in the regulatory pipeline long before then.

    ReplyDelete
  6. Strange trading in gold, ADP numbers blew away expectations, dollar rallied but so did gold?? Any thoughts on this, nervous nelly short covering in gold?
    Judging by the jobs numbers I would assume non-farm on Friday should also be a beat - which will be a strong confirmation of Fed taper in December, atleast that's how the market will perceive it.

    ReplyDelete
    Replies
    1. I think its because copper bounced on the ADP beat pulling gold and silver up with it.

      Delete
    2. I think what we're seeing this week is sell the rumor and buy the news playing the short side. What next eh?
      Question is will it be the same game for Friday's jobs numbers.
      These curv balls make it tough for the retailer to pop a trade.

      Delete
  7. So copper says the economy disconnected from the stock market early this year? Wonder what happened then.

    Should be seeing it in the upcoming earnings season.

    ReplyDelete
  8. Matters not
    Here is a headline from Reuters this morning:

    "Shares slide as U.S. data crunch gets off to strong start"

    This is all you need to know. If the economy truly does get better and they take away the QE punch bowl, guess which way the Dow goes?

    ReplyDelete
    Replies
    1. Maybe but gotta watch out for knee jerk reactions. Even if they taper 15 million, that's still 70 million life line.

      Delete
  9. My comments are not getting published. Anyone else having the same problem?

    ReplyDelete
    Replies
    1. Concord; sometimes there is a delay; just leave the site and go back in 15 mins or so; it will then pop up; the red metal pop today is just short covering and that is all from sparks

      Delete
  10. Copper is up 3%+ today.

    Why did Silver pop today ?

    * short term trading chases prices higher in the "19" trading range
    * Silver tracking with Copper
    * the proverbial short covering

    I'm waiting for Ag @ $18.60 spot since that will correlate to Ag @ $19.50 an ounce delivered.

    ReplyDelete
  11. One of these days, the bonds will go down, not as an indication of any tapering, but as the result of inflation.

    ReplyDelete

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